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Volkswagen Group’s stock price has collapsed 30 percent since news broke last week that the company doctored engine management software to conceal tailpipe emissions exceeding EPA standards. Why would a global corporation risk an estimated $18 billion in fines and penalties to eke a bit more mileage out of a diesel power plant that is already remarkably thrifty and powerful? The figure below tells the story in one chart.
Corporate Average Fuel Economy (CAFE) standards were first imposed by Congress in 1975, in the wake of the Arab Oil Embargo. In 2007, the Democratic-majority Congress passed the Energy Independence and Security Act (EISA), mandating escalating use of biofuels such as ethanol, phasing out the incandescent light bulb, lavishing subsidies on electric vehicle manufacturers, and instructing the US Department of Transportation to ratchet the CAFE automotive standard to at least 35 miles per gallon by 2020 and to “maximum feasible levels” through 2030. EISA also allowed manufacturers to trade credits earned by exceeding CAFE requirements. The penalty for missing the target is significant: $5.50 for each 0.1 mpg shortfall multiplied by the total number of vehicles sold.
Looking at the chart, we see automotive fleet fuel economy (“Car CAFÉ Actual”) climbing significantly above the mandated level beginning in 2001-2002, occasioned by the gas price spike shifting consumer preference away from SUVs and toward more fuel-efficient vehicles. However, look further right and you will see a brave new world of impossibility looming for every conventional automaker.
Many people do not want to buy ultra high mileage cars. For a growing family or a busy salesman, attributes such as space, comfort, and affordability outweigh the prospect of a lower fuel bill. For 20 years, automakers met the CAFE standard by subsidizing the sale of lower-end economy cars in order to win the right to sell customers the vehicles they actually wanted to buy. Those days are over.
It is hard to contemplate the coming Big Auto Götterdämmerung without wondering whether former vice president and apocalyptic global warming prophet Al Gore is secretly steering US transportation policy. In order to remain solvent, all automakers will soon need to sell large numbers of all-electric vehicles or purchase indulgences—CAFE credits—from others who do. This mandated fact-of-life explains why Tesla, selling only 40,000 cars this year, is worth $33 billion, while Volkswagen Group, with 11 million vehicles sold, is valued at only $52 billion (and falling).